I am a professor of economics at The University of Georgia and consultant on economic issues to a variety of corporations and local governments. Taking a generally free market, libertarian perspective, I use economics as the lens to analyze government policies from the local to the international level. I have a particular focus on government policies that strive to redistribute income or wealth either openly or in indirect ways. A lot of those thoughts are collected in my e-book, Ending the Era of the Free Lunch.

Don't Believe The Debt Ceiling Hype: The Federal Government Can Survive Without An Increase

Ignore what you hear and read in the news. The federal government actually reached the legal debt ceiling about four months ago. Since then, the government has been financing its monthly budget deficit by stealing/borrowing money from other government funds, like the federal government employees’ pension fund. In about two weeks, the government will run out of tricks to keep operating as if nothing has happened. If the debt ceiling is not raised by then, the government has to balance its budget.

That’s right. As much as the politicians and news media have tried to convince you that the world will end without a debt ceiling increase, it is simply not true. The federal debt ceiling sets a legal limit for how much money the federal government can borrow. In other words, it places an upper limit on the national debt. It is like the credit limit on the government’s gold card.

Reaching the debt ceiling does not mean that the government will default on the outstanding government debt. In fact, the U.S. Constitution forbids defaulting on the debt (14th Amendment, Section 4), so the government is not allowed to default even if it wanted to.

In reality, if the debt ceiling is not raised in the next two weeks, the government will actually have to prioritize its expenses and keep its monthly, weekly, and daily spending under the revenue the government collects. In simple terms, the government would have to spend an amount less than or equal to what it earns. Just like ordinary Americans have to do in their everyday lives.

Once the reality of what hitting the debt ceiling means is understood, the important question is: can the government actually live with a balanced budget? How much money could it spend? Could enough spending be cut to live within a balanced budget? The answer is yes, the federal government could live with a balanced budget. Below I will show you precisely how.

The federal government estimates it will collect almost $3 trillion in revenue for the fiscal year that runs from October 1, 2013 until September 30, 2014. Below I demonstrate one possible way the federal government could institute some priorities and spend only the amount it receives in revenue. (All the numbers I use to construct the balanced budget below can be found here.)

To begin with, the interest on the national debt must be paid. I will budget $240 billion for that. The White House is guessing a little lower, but interest rates have been rising, so I will play it safe. Next, social security payments should run about $860 billion. Place that as the second priority and we already have spent $1.1 trillion of the $3 trillion we have.

Holding Medicare spending to about its fiscal year 2013 total and making some small cuts to Medicaid and other health spending would keep health care spending by the government to $860 billion. This does not include additional spending for the Affordable Care Act, but we need to prioritize and I am making it a lower priority than the health spending we have already been incurring. Also, there is no need for extra spending for the Affordable Care Act before January 1 since the coverage does not start until then. So as long as the debt ceiling is raised before then, there is no problem.

Veteran’s benefits will cost another $140 billion if we leave it unchanged. Department of Justice programs and general government functions add another $83 billion if their spending levels are held roughly constant. We can save some money by cutting science funding to $10 billion and international affairs spending to $13 billion which is enough to operate the State Department and embassies, but not pay foreign aid. This takes total spending to $2.2 trillion.

Cutting spending on conservation programs in half and paying only for agricultural research programs (no more farm subsidies) would cost $25 billion. Some moderate cuts to transportation spending bring it to $90 billion. Slicing education spending in half would reduce it to about $40 billion. The total for annual spending is now $2.36 trillion.

That leaves only about $300 billion for defense spending. However, employee contributions to the retirement plan and some miscellaneous offsets that the government does not count as part of the $3 trillion in revenue expected next fiscal year bring in $90 billion per year. That means we can spend about $400 billion on defense and still have a balanced budget. This would reduce military spending back to 2003 levels, before we were fighting wars in the Middle East. Not a small cut, but probably feasible.

Most people will probably complain about one or more of the cuts proposed here. That is to be expected. If you didn’t notice, NASA and the Departments of Commerce and Energy were completely eliminated. Deep cuts were made to some other departments (Education, EPA, Agriculture, and HUD). Welfare spending was reduced. However, the point was not to propose a budget that people loved, but to show that a balanced budget was not completely beyond reason.

After all, the above spending paid all interest on the debt, left social security, veterans benefits, justice and law enforcement agencies, federal employee pensions, food stamps, and general government functions untouched, continued Medicare and Medicaid with some small cuts, and still spent non-trivial sums of money on education, transportation, and defense programs.

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If communities, municipalities, cities, states and countries want to preserve quality of life and dampen the oscillations of economic highs and lows… then it only makes sense to borrow during down-turns and conserve during upswings.

The mandate of having a Balanced Budget every year results extreme inefficient use of Public Funds and inhibits the development public programs, disrupts continuity in public services and erodes quality of life.

The only blame worth assigning is to our elected leaders as they failed all of us.

Define “extreme inefficient” for the rest of us taxpayers. Would you categorize the last twelve years of Federal budgets as “efficient”? Yes, some public programs would not receive Federal funding. That doesn’t prohibit state and local governments from funding them, nor does it prevent private source of funding. In fact, by eliminating the crony capitalist processes that dominate solitication of Federal funding, these “public” programs would have to stand on their own merit. If that’s not possible, then they don’t deserve the money from any source, private, public or otherwise.

I, personally, don’t want any government to attempt to manage the business cycle. Those attempts end in Too Big to Fail and the Great Depression. Recessions are a good thing, economically, despite the generally negative connotation in mass media and society-at-large. They represent the feedback mechanism in the business cycle required for long-term economic improvement. At least they have for every recession since WWII until 2008, when the Federal interference has cost Americans millions of jobs that should have been created by the economic boom that normally would have followed such a recession.

Let’s talk failure when you’re ready, since we’re smack in the middle of it.

Okay, yes and no. The question is is the ‘Government’ 100% efficient? Is that its goal? If so your argument would make sense. Now I know people hate to compare Government to a company but it is a needed thing in order to explain why your logic is fallible.

By forcing a ‘balanced budget’ what you are actually doing is informing the Government that they are accountable for the monies they receive. In a business this is done via a board and shareholders, or in the end profitability.

What other motivation would Government have to come up with methods to become more efficient? Let me ask you this. Currently there are 800,000 Government employees that are not at their jobs. Why do we have them? Are you noticing a credible pain in the quality of your life? States must balance their budgets, etc and so on. A balanced budget MAY include a certain amount of debt that the State can go into as a portion of its GDP.

A balanced budget is meant to keep a constraint upon foolish behavior, such as allowing the debt to reach levels of $150,000 per household… That means that the Federal Government could have purchased a house form most of the population of the United States with the debt it now carries.

Ah, now there is an interesting notion, scalable debt limits. Sadly, I doubt such limits would follow any simple formula if they were to lead to good effect. Certainly it would seem sensible to base limits on what the average American might find conceivable to repay (amortized over x years, assuming say 5% inflation with a per capita GNP adjustment based on long term averages).

However, it seems only obvious that in good years (strong private spending, higher than average per capita GNP), the government should be taking money out of the economy, whether by paying down the debt, providing fewer services, or even making foreign investments; this would help to slow down the booms that later lead to crashes. Contrarywise in weak years, the government should do the opposite. It is in considering better/worse times that we seem to be falling down, because we need a lower debt ceiling during good times, IMHO.

I see us as slowing moving in the right direction, superficial though our politicians are. Traditionally, we have had our choice between the borrow-and-spend Republicans and the tax-and-spend Democrats. No subtlety on either side, and when either one or the other party was in power, the debt and deficits have gotten worse. It is only when the two parties have been in some semblance of balance that either gives more than lip service to fiscal conservatism. The last time this happened (under Clinton) it didn’t stick.

This time, I have my fingers crossed because if the tea party won’t back down by October 17th, Obama will be constitutionally forced to balance the budget, and he will have a free hand to fund or jettison what spending he will. That should be an interesting, if not entirely pleasant, experience. There will be a great deal to be learned from it and perhaps we shall emerge the wiser.

Personally, I would much rather we could develop a sensible plan to move toward an optimum debt/spending/investing position, because the coming crisis may prove traumatic. But our politicians in the last two or three decades have been too immature and ignorant to do so, and the present crop is no better.

-Incidentally, I am a social liberal / fiscal conservative as indeed many women are. I was a Republican at one time but I felt forced to switch 1) because the Democrats are more sympathetic to my concerns about fairness and 2) because I feel I can be of more influence putting the brakes on irresponsible spending as such. The Republican party did not listen to my concerns about deficit spending when they were in power, whereas the Democrats do. Still, there are many voices in the Democratic party urging tax-and-spend. I could use reinforcements. The Republicans are sinking. Let the sensible fiscal conservatives take over the Democrats!

Yes, some public programs would not receive Federal funding. That doesn’t prohibit state and local governments from funding them, nor does it prevent private source of funding.”

Which, historically, has failed to appear, thereby necessitating “big government” to step in, and pick up the slack.

“… these “public” programs would have to stand on their own merit. If that’s not possible, then they don’t deserve the money from any source, private, public or otherwise.”

Sounds like a nice assertion, but it is baseless, and without merit. Moreover, again, it has proven to be historically inaccurate.

“Those attempts end in Too Big to Fail and the Great Depression.”

Nice job of fantasizing that you have going on there-however, the truth, a much more accurate predictor of these things, is that this “management of the business cycle cannot”, and has not, been able to account for greed, corruption, and the egos and narcissism of the moneyed elite. Nice try? Not so much. As for the rest of your false diatribe, it falls victim to the very same problems and practices.

Big business, and Corporate America, have, do, and always will, take advantage of everyone, and every thing, left unchecked by We The People, and our Government. All of your antiquated, pipe-dream assertions and suppositions aside, in has been, and will always be, big money that is both the boon and the bane of our country, and our economy. So much negativity is directed at the laborers and consumers who support these very businesses, but the true fact of the matter is that if business could produce, consume, and profit without paying these people a dime, that is exactly what business would do. It is inherent in thinking that there is a difference between “business ethics” and ETHICS.

Let’s talk failure when you’re ready, since we’re smack in the middle of it. And it was brought upon us, at every turn, by the conservative. From Standard Oil and before, to Enron, Halliburton, Madoff, Big Banks, Big Insurance, and the rest of those greedy soulless that feast off the sweat of the working man. That’s why they all spend so much effort in trying to buy their way into heaven, before they go out.

Big Business, not the poor, the working poor, or the middle class, is exactly who is always wanting something for NOTHING. And they are the biggest welfare queens in our economy. *meh*

The analysis above ignores the fact that the president cannot just cut programs however he would like. When congress passes laws directing that money be spent, the president is required to spend that money.

The problem here is that congress has authorized more spending than taxes and other income (also set by congress) can cover… and now may not authorize borrowing to make up the difference. The president is constitutionally required to spend the money… but also not allowed to increase income or exceed the debt limit. Thus, if Congress does not raise the debt ceiling they will have created a situation where anything the president does will be a constitutional violation. The constitution mandates control of all three variables; spending, taxes, and debt, to congress… but carrying out these directives to the president. The possibility that congress would not authorize taxes and debt sufficient to cover spending is not covered in the constitution.

Given an impossible situation, Obama could theoretically decide to start cutting spending as the author suggests… but every one of those spending cuts would then immediately be challenged in court and likely over-turned on the grounds that Obama was usurping congress’s power to determine spending. If Obama instead ignores the debt limit it will still result in a court case, but just one rather than dozens… and Obama could argue that even without raising the debt limit congress had EFFECTIVELY authorized the borrowing by enacting spending legislation in excess of revenues – a situation which can ONLY be fulfilled by borrowing. A sane Supreme Court would certainly side with Obama on that argument… what the Roberts court would do is anyone’s guess.

Conrad, if the debt ceiling is not raised, the President will have a certain amount of money, x to spend on programs for which congress has allocated y, where y is very much greater than x. He is constitutionally required also to spend z for debt service, pensions and so on. His duty is only to do the best he can to make the available funds go as far as they will; the constitution never said the President had to get blood from a turnip. No indeed, if the instructions sent to the President contradict themselves, he has full liberty to act as he will (within congress’s authorization limits) while spending every cent available.

It will be interesting to see what the courts decide should challenges be posed.

well at least someone is publishing a common sense approach to getting hands around this out-of-control government spending. As the old saying goes, it is not hard knowing the right thing to do–it is the doing it that is hard.

The problem is we need to do more than just balance the budget. We need to run a surplus so that we can start paying the debt down. Unfortunately, the last time we had a surplus, taxes were reduced to compensate and so we still came out behind.

We need a long term plan spanning decades to dig ourselves out from the hole we’re in, and I am not optimistic that we have the discipline required to enact such a plan.

Beth, The reason we had a surplus was that we were at the height of an economic boom. The total amount of ‘cost’ that the Bush tax cuts cost were only around $800 Billion during his administration. But by the same token it was one of the reasons we had a boom before the last bust lol.

If we were to institute the exact same tax rates today it would bring in about an additional $80 Billion a year. About $700 more in tax per year per household.

$700 per household today is crazy given what most people earn, though I don’t doubt you on the statistic. I saved thousands of dollars a year on my tax returns when the Bush credits kicked in and you can have no idea how angry I was to be contributing to the federal deficit, what with my being a fiscal conservative and all.

I have NO PROBLEM paying my fair share.

I DO have a problem paying more than my fair share.

If truth be told, I still resent that the day of accounting was put off and what is due is larger now, but that’s how it is, I’ll cope somehow.

Really? If you feel you are being taxed too little, you can simply not cash those checks. Or you can take fewer deductions.

Tax forms should have a line for “Would you like to donate a portion of your refund to paying down the national debt?”

700 per household would be an average across the households.

Realistically, the surplus disappearing had more to do with people losing jobs. When people lose jobs, they pay less in taxes(or not at all), and begin pulling money OUT of the system. It’s why the creation of jobs is such an important thing. Get people back on their feet, and paying in. Stifling business and cutting them off at the knees when they are just starting out tends to cause layoffs, and cutbacks and worse, closures.

That would be true for most countries, but the US is unique in one major way. That “debt” is one of the most prized assets in the world. T-bills are, by far and away, the most desired safe asset in the world. They are, in many ways, the foundation of the world financial system.

Running a surplus and paying off the debt essentially means reducing the number of T-notes, T-bills, etc. in the market. There won’t be enough safe assets where people can park their money. If history is any indicator, someone will try to invent new safe assets (like AAA rated CDO’s) or start parking their money in riskier securities. This can be very destabilizing.

The actual goal shouldn’t be to reduce the debt, but reduce the debt burden. A $10,000 debt is a much bigger deal to someone who makes $20,000 a year than it is to someone who makes $2,000,000 a year. In the case of the latter there’s really no fear of insolvency and you can essentially roll over the debt forever. That’s not the case for our $20k person.

In that sense, it’s not the amount of debt that matters, but the size of that debt relative to income. Right now, in the US, I’d agree its too high. In the future, we want the ratio of debt to income to be lower. But notice, that’s entire possible without lowering the actual dollar amount of the debt. In fact, it’s possible even if the debt increases as long as our GDP increases at an even faster rate.

Remember, every bit of gov’t spending ends up as income to someone. Cutting gov’t spending is akin to taking income away from people. That doesn’t help economic growth. There is no way to reduce the debt via spending cuts without reducing people’s income (and also no way to reduce the debt by raising taxes without hurting people’s income). In many ways, a spending cut is the same as a tax increase. They’ll both help balance the budget, but they’ll both hurt growth. They both affect the ratio of what is being taken from the economy by the gov’t and what is being added back to the economy by the gov’t.

Deficits are when the gov’t gives back more than what it takes in. A surplus, whether obtained by spending cuts or tax increases, results in the government giving back less to the economy that what it’s taking out.

They’re much more similar than many people realize. In that sense, it’s funny that those who proclaim they are Taxed Enough Already favor such spending cuts. In so many ways, the effects are very much the same as a tax increase!

Are you sure t-bills are considered a super-safe asset? Have you checked our credit rating lately?

You also suggest that any government spending cuts would have only negative economic effects because someone’s income was being taken away in one way or another. This might be true, but isn’t it also true, that if government spending is reduced, money that would have been taxed over to the government is left in private hands to spend, save, or invest in a different, perhaps more productive way? What about the portion of government spending that exceeds revenues? If spending were reduced to create a balanced budget or surplus, the dollars no longer being created out of thin air to increase the money supply necessary to cover the deficit would allow all existing dollars to better hold their value, and thus prevent our wealth from being inflated away. I’m not expert, but would all the effects of cutting government spending be bad?

We have to do no such thing. The finances of the U.S. Federal government, an entity that is a currency issuer and not a currency user, an entity that does not have to ‘earn’ or acquire the currency to pay its obligations in that currency, are qualitatively different than those of a private household, a business or a corporation.

There is no “hole” from which the U.S. or “the U.S. taxpayers” or “our children” or “future generations” have to ‘dig ourselves out from”. There is no need to increase taxes or reduce government spending “to find the money” to “pay down the debt”. None of that applies to the U.S. government, as well as the governments of all other monetarily sovereign states.

When the U.S. ‘sells’ Treasure bills it merely removes some of ITS currency from circulation, exchanging non-interest bearing (Federal Reserve Notes) for interest-bearing (T-bills) liabilities. It is not ‘borrowing’ U.S. dollars in the same sense that a private entity or a State government does.

There has been massive multiplication of the currency supply the world over, ther’s no shortage of money at all. This shortage falsood is required as this massive wealth is being accumulated by a very few and not by designing/ selling Mac’s etc alone. Moving money is the 2nd biggest buissiness in the world, creating the money supply is by far the biggest.

And if the pupulace wake up to this massive and massivly increacing currency expansion, they me well ask/investigate how it is created ? Then They’le quickly see the scam.

The world financial system is this simple. YOU LEND PEOPLE MONEY THAT DOESN’T EXIST AND YOU CHARGE INTEREST ON IT. That’s it, everything comes out of that.

The Last American president to try ( and brieflly succeed) in issuing debt free money was assasinated.

An attempt to assainate Ronald Reagan followed his order of The Grace Comission, which conluded every single nickel of US income tax is spent on private bank interest charges.

Modern Money Mechanics + other Federal Reserve sources + other banking leaders have stated that if all debt, including govornment debt is paid off, there would not be a single dollar in circulation, I add ‘and the debt would still not be paid off’

It is a system of slavery and is a debt on unbacked numbers in a computer, i.e. ABSOLUTELY NOTHING.

“Most people will probably complain about one or more of the cuts proposed here. That is to be expected. If you didn’t notice, NASA and the Departments of Commerce and Energy were completely eliminated. Deep cuts were made to some other departments (Education, EPA, Agriculture, and HUD). Welfare spending was reduced. However, the point was not to propose a budget that people loved, but to show that a balanced budget was not completely beyond reason.”

No I noticed, as I do every time one of these “it’s easy to” articles appear, that the ox of the ruling moneyed class never gets gored. Let’s cut programs to the poor, let’s evicerate pensions retirees paid into and EARNED. Just keep that tap turned on to Wall Street fatcats and the military industrial complex.

I proposed fully paying all government employee pensions, cutting military spending by about one third and don’t recall there being any spending proposed for Wall Street Fat Cats, so I am not sure what you are talking about. Yes, if we have to balance the budget, welfare payments will have to be cut. Since 70 percent of what the federal government does is transfer money from one person to another, there is no way to balance the budget without cutting some of that spending.

Don’t listen to what Peter says Jeffrey, it’s obvious blind Progressive rage. Peter lives in a fantasy world where he truly believes that the solution is as simple as raising taxes on the rich and the Treasury printing $85B a month will have no ill effects. In his mind, the federal government isn’t spending enough.

@ Peter White – Seems to me author the gored the ox of every variety of welfare for the rich: farm subsidies and the like. Moreover, the author won’t be the one to make such decisions; godforbid the House lets the debt ceiling pass without raising it, Obama will.

I also didn’t get the idea this was an “it’s easy to” article. I see it as an “it’s possible to” article.

Should the House fail to raise the debt ceiling, the executive branch will have hard choices to make but plenty of maneuvering room, that’s what I got out of this article, and it gives me hope that maybe everything can come out ok after all.

Right… cut welfare, which goes to? The poor. Cut the Department of Education which helps who get educated? The poor. Cut Food Stamps, which feeds who? The poor.

Where did you mention closing tax loopholes that allow the wealthy to shield their income? Where did you mention ending oil subsidies? I must have missed those points.

You cannot lecture about the inability of Congress to balance their budget without mentioning the most basic fact: you need to have INCOME in order for ANY budget to work. It cannot be a zero-sum game where the only possibility is to take, and not give. It can’t be all cuts.

Further, you’ve written this essay, and obviously taken great pains to show how “easy” it is to deal with the upcoming debt ceiling “showdown”, but you haven’t mentioned any of the legislative issues that accompany it. First, what happens when the debt ceiling is not extended? What is the President required to do? First of all, the Constitution does not authorize the President to determine levels of spending, cutting, or taxing. Those powers belong to Congress. The President legally has to carry out the spending that the Congress has authorized. Not a penny more or less. If you want to lower spending, you have to start there, and the Republicans are NOT the party of “less spending.” They haven’t been in 30 years. They’re about spending and giving away money to *the right people*. Their stubborn refusal to raise income will only exacerbate the situation.

Second, the sequester did not go “unnoticed.” My elderly mother, who is physically disabled and barely able to walk, let alone undergoing treatment for breast cancer, stopped receiving food stamps under the sequester. She stopped receiving housing benefits. And now, she faces the possibility of an interruption in her social security check. I have had to take up a second job to help support her, so that she doesn’t become homeless. So NO, THE SEQUESTER HAS NOT GONE UNNOTICED.

Your hypotheticals make it so easy to dismiss how much of an impact these cuts would have, but they don’t address the realities of what they would mean. They would mean millions going hungry, not going to school, becoming homeless. But all of those people would come from one class and one class only: the poor. So let’s not worry about them, right? The rich will still be able to go to private school; they will still be able to go to $100 a plate restaurants, and they’ll still be able to visit their beach houses on Long Island sound. So it will all be OK!

Jeff Take a close look at government employee pensions and Health Care specifically NON MILITARY. The unfunded liability of these programs not counting military is approximately 356 trillion dollars. They cost us about 90 Billion a year. Congress and the senate are included in this. I noticed you also kept the budget for the department of justice untouched each year. We keep about 95,000 non violent drug offenders in federal prison (not State) that cost is about 2.8 Billion. Tax loop holes 1 trillion a year. Medicare Fraud, Tax fraud and social security fraud about 50 Billion a year each. I’m all for a balanced budget and buy in to the premise that not raising the debt ceiling wouldn’t kill us all. What I don’t buy into is the egregious inefficiency of government programs and allowing it to continue at the expense of cutting any money from education. While welfare and food programs have their own fraud issues making blanket cuts to people who really need those things and allowing the fraud to continue is ridiculous. Cut out the tax loop holes, outsource the admin portion of government and military agencies, release the non violent offenders from federal prisons and have the DOJ spend that money on eliminating fraud. I Think you would find a similar result for a balanced budget and a more efficient government. Of course not everyone is going to love that plan either specifically politicians and the wealthy cheaters.

Even if we accept all your premises in the article, how do you account for the loss of tax revenues not only to the federal but state and local government due to sudden cuts in spending to each of the sectors? The tax revenues that come in are at least in part a result of federal spending in different sectors. So there will be a loss of tax revenues. The federal govt. is not like a family. Even in a family, you make investments in education and housing in order to grow your cash flow in the future. So cutting spending on education is shooting yourself in the foot to reduce the wait of the bullet in your gun to allow you to run faster. Cutting spending on conservation (notice that this is a so-called conservative idea) is supposed to help the future generations how exactly?? So that the fat-cats can get their tax cuts and build enough defenses against storms, floods and droughts?? Hypocrites!!

Dorfman doesn’t seem to grasp that what he is proposing completely flouts the rule of law. The Congress has already authorized and appropriated expenditures at the current level. The President has already signed these into law. Dorfman proposes to ignore all that and to focus on an arbitrary debt ceiling. So, he wants the government to stiff contractors who have already started work, employees who have, in good faith, accepted job offers, local governments who have already started work on federally funded projects, and otherwise inflict massive harm to individuals and groups all to achieve an arbitrary budget goal.

And how is this supposed to work? In Dorfman’s dystopian fantasy, the President would ignore prior Congressional mandates and prioritize spending. The Constitution does not grant the President that power. The Supreme Court has ruled twice that the President doesn’t have that power EVEN IF THE CONGRESS DELEGATES IT TO HIM. Google Clinton v. City of New York, 524 U.S. 417 (1998)

So, Dorfman’s scheme is illegal from the git-go.

A failure to raise the debt ceiling would mean that the government would have to pay bills in the order in which they arrive, using revenue as it comes in, and many bills would simply not get paid. The flow of revenue is inconsistent, so there could be no reliable planning by government or contractors, or beneficiaries of Social Security and other programs.

Finally, Dorfman seems to have some twisted idea of how the economy and government work. He seems to think that cutting federal spending is a worthwhile goal in itself, not matter what the effect on employment and economic growth.

Dorfman is lending his creds as an economist to a destructive movement, the Republican campaign against the US government itself. They are trying to use budget hostage taking to get measures that they couldn’t otherwise get through Congress. It is shameful that Dorfman is providing an academic gloss to this extortion.

First, since the Congress has not passed a budget or continuing resolution for the new budget year, most spending has not been authorized, therefore it does not need to be spent. Entitlements are authorized, but we can cover all that with incoming revenue.

Second, if the president has no authority to act except by following Congress, then why has he decided to legalize illegal immigrants who were brought here as children, not prosecute marijuana cases in states that legalize it, arbitrarily change the Affordable Care Act whenever he feels like it, and on and on. President Obama clearly believes as the chief executive he has the right to set priorities for government action. He can do the same thing with spending. President Obama does not agree with you.

Third, I assume that Congress would decide on the budget cuts to balance the budget, not the President, but either could work.

Fourth, I am not saying this should be done, just that it can be done and that the President is lying when he claims failing to raise the debt ceiling forces a default.

Fifth, cutting government spending is indeed a worthwhile goal and would, in fact, benefit both economic growth and employment. The economy was much better when government spending was a much smaller share of GDP.

Finally, why are the Republicans practicing extortion when they try to get what they want while Democrats are not when they block those bills and refuse to budget from their position at all. Republicans have been compromising; it is Democrats who have refused to play nice (or play at all).

The President has all kinds of power re executive order, but courts have ruled that the President does not have the power to prioritize spending. Does refusing to raise the debt ceiling force a default? It does if government spending is limited to incoming revenue, because revenue on hand may be exhausted by the time a particular interest payment comes due. Presto, default on Treasury debt. And what do you call it when the government doesn’t pay a $15,000 Medicare bill ? Or its obligations to Social Security recipients, or the salaries of the on duty military. Ordinarily, when someone doesn’t pay bills, he is considered to have defaulted. We would end up in a position in which the official national debt (which is denominated in outstanding Treasury bonds) might not rise, but the overall amount of money owed by the government on its various LEGAL obligations would continue to rise. The government would owe more, just not in the form of bonds. The reduction in debt is illusory.

Your idea that the Congress is going to arbitrarily cut spending and agree on priorities that involve massive cuts and elimination of agencies is touchingly naive.

In your claim re the relationship between economic growth and relative size of government, I think that you have causality reversed. When the economy is healthy, the government is smaller relative to GDP. When the economy is below potential, the government is relatively larger. Fluctuations in GDP are the cause, not the effect. But it is ridiculous to say that we can chop, say, half a trillion dollars out of the government portion of GDP without a serious negative effect on GDP. Even without multipliers, a cut in GDP is a cut in GDP.

As to extortion: Funding the government is the responsibility of the Congress. It is not a political concession to the President. The Senate (unwisely) has already agreed to the House dollar amount for the continuing resolution. The House Republicans, however, have grafted on a delay in implementing Obamacare, the end of mandatory insurance coverage for birth control, and the REINS bill, which would require a vote in Congress on any EPA regulations. None of these things would pass Congress on the merits. So, the House is refusing to fund the government at the amounts that they agreed to, unless their extraneous demands are met. How is that not extortion? If the Democrats give in to this, the nation will no longer be governable. Presidential and Senate elections will be meaningless.

It’s too bad we can’t go back to the good old days when we had a President who was willing to actually work with Republicans in Congress to balance the budget. Yes, I’m talking about Bill Clinton. Call it political savvy, guts or just common sense, but it appears that Obama has none of these attributes.

Nick K – Too bad we no longer have a Republican Party that is a responsible participant in government. What we have is a Republican Party which is dominated by the so-called Tea Party base…people who hate government per se, rejoice at shutting down its functions, and who hate most other Americans. They delight in forcing other Americans into destitution. There is no”working with” those folks. They want nothing less than the destruction of the US government as we know it. And Boehner can’t keep his job without appeasing them. In fact, if President Obama were to “work with” the anti-American faction of the Republicans, he would just be subject to blackmail again when the continuing resolution expires or when the next debt ceiling increase runs out. If you think that I am exaggerating about the Tea Party mentality, I invite you to read their websites, particularly the comment sections, or get into some conversations with their rank and file. Let’s review now: What did Bill Clinton get from dealing with the Republican House? That would be a permanent investigation over a land deal and impeachment during a time when he was trying to avoid a war in the Balkans. That’s a real incentive to work with these guys! In fact, President Obama can not give in to these folks. If he does, the rest of his Presidency, and the administrations of any future Democratic Presidents will be characterized by continuing economic sabotage and crisis mongering by the Pubs.

Too bad John Boehner can’t even control his people..Never happened before. If Republicans can’t control their own out of control Republicans whose mission is to squash the US government, Democrats are not going to. Putting millions of people out of work would crush this country.

dallasd, ??? What you been smoking? We hate government? That’s a ‘progressive’ propaganda talking point. And a lie. As is most of your post.

We don’t like UN Constitutional govt. We don’t like the Constitution to be rewritten by activist judges. We don’t like having our ‘choice’ limited to only killing a developing child.

We do want to see non Constitutional agencies like the EPA, education, Fannie & Freddie, fed welfare (a state responsibility) NASA & other illegal stuff shut down. We want foreign aid to stop. Congress to live under what they force on the rest of us. We do like having laws. We especially like the Constitution. And we see putting the fed govt back under it’s constraints as a good thing. A VERY good thing! We don’t like UN-Constitutional law, but we do NOT want anarchy.

And we don’t like our sovereignty handed over to the UN via treaty.

You ‘progressives’ don’t want all the above to change. You like big over reaching citizen & free market stifling govt. So you call us Taxed Enough Already people what you are in a vain attempt to deflect the truth.

sam fox – That is an example of the bizarre paranoid ideation typical of the so-called Tea Party. You guys seem to like the Confederate Constitution but you seem to have contempt for the real Constitution of the real United States of America.

Sadly as long as there are no term limits and we have nothing but career politicians nothing is going to change. As I recall this president has not ever submitted a passing budget. Our government has done nothing but bandaid one thing after another and blame each other. Term limits, no benes, then go back to working in the real world under the laws you pass. A dream only as those in power would have to pass such a thing and with them having said power, this will NEVER come to pass.

The Republican Congress dragged Clinton kicking and screaming toward fiscal responsibility. You also might remember that they saved the Country substantioal debt by disposing of the abortion known a Hillary care which would have bankrupted us Yet, still the Liberals want Obama Care (Projected to cost Three to Five times what Hillary care would have.) and are willing to sacrifice whatever gets in their way of enacting this sacred Liberal albatross.

In the End Congress controls the purse strings. PERIOD. Let Senate and the POTUS deal with THEIR jobs.(Instead of trying to overstep their athority.

You are completely ignoring that unemployment is going to go to 30% because of all the lost jobs. There will be people going hungry and also dying from medical issues. All those people with lost jobs will use the emergency room as their dr. only it will be so much more. Unless you are suggesting that we don’t give emergency care. You cannot cut welfare in half without collateral damage aka human lives.

I did not see where you are reducing our federal taxes, while the price of nearly everything is going to go up. Taking half of education means teachers and other staff are all unemployed too and our schools get worse. With all of these people unemployed, they are not paying federal taxes, so the government has to take away more.

It is absolutely insane to make big budget cuts at a time when we have been gradually pulling out of the damage Bush did to our economy. Please don’t try to say that 2008-2009 wasn’t terrible while we got back on our feet. We would be there again, with half of the pensions that the hard working middle class made, just disappearing again.

I have seen discussions about the U.S. dollar no longer being the world’s reserve currency. As the value of our dollar drops, it won’t only be China who is currently outraged. All those $$’s in oil seem at risk if we are not the reserve currency added to the dollar’s value dropping. We are at sequester levels right now and it is hurting people. It is disingenuous to suggest that the Republicans have been doing all of the compromises.

I wasn’t really tied to Democrat or Republican until now. I watched the house laugh and play games instead of trying to solve our problems. The vote they did on Oct. 1 right before they closed the government will probably not hold up when it gets to Supreme Court. I think it was #368. It took away all of the representatives rights to call for a vote. I truly thing that the 14th Amendment was written to protect our country from this kind of harm. I’m disappointed that Obama has not been able to open the government back up with an executive order. Closing the government over a law that was passed and also affirmed legal by the Supreme Court should be an impeachable offense.

What if the Senate closed the government down to get rid of corporate subsidies or to make lobbying illegal. That would be just as wrong and I guarantee that the house would not agree to that kind of blackmail. Harming our economy so people will not get healthcare is like blowing up your home to get rid of mice. This is not for the good of America.

you sound like a good republican with the fact that you republicans have shut the government down and now want the poorest people to suffer while you sip mix drinks by your pools in your mansions while the poor are homeless and people starve! you article and your view point is total nonsense! sell it to the rich 1%, because your view point is rhetorical nonsense! Forbes is for the jet set crowds anyway!

There is really no need for inflammatory rhetoric on this otherwise nice thread, thank you z z. I don’t know about the others commenting here but I live on the typical 1/4 acre in a 1300 ft^2 house, growing much of my own food despite my small space, very middle class. I disapprove VERY strongly with the government shutdown.

Yet I agree with the author that if the republicans continue their intransigence, matters might not turn out so badly. I suggest you re-read the article and try to set yiour bias aside,

Dorfman is simply wrong about the legal standing of what he proposes. He uses examples of the Executive Branch making changes in how criminal law is enforced, but enforcement of federal criminal law is Constitutionally ENTIRELY within the function of the Executive Branch. Spending is ENTIRELY within the function of the Congress. The Treasury has no authority to privilege one valid claim for payment over other valid claims. The claim of a bondholder for payment of interest has no greater validity than the claim of a contractor for payment for services rendered. If Dorfman wants to advocate for the President to ignore Constitutional restrictions, it would make more sense to suggest that the President order Treasury to ignore the debt ceiling and just continue borrowing to maintain the full faith and credit of the United States. The President is quite right not to negotiate w/House extremists: what the House is doing is extortion, plain and simple, and for what? A 45-day continuing resolution. What will be the demands for the next CR? What will be the demands for the next debt-ceiling extension? If the debt ceiling is not raised, the U.S. will default on debt payments, and the results will be entirely the fault of GOP extremists. Perhaps it will be worth it, if only to prove once and for all that the current GOP is incapable of governing and does not deserve to be elected to any leadership whatsoever.

Hey Jeff Great article and thanks for clarifying the issue on default. I am so tired of the deliberate obfuscation on the debt limit and default and I agree the most important point is that we do have a path forward. However, I would like to have you try and reconcile something for me. Examing our monetary system, it appears that the use of fractional reserve banking makes Money=Debt. The money supply only gets created when debt is increased.

If adding additional debt is the only way to grow the money supply and the government borrowing is reduced without any aggregate increase in demand by consumers (C+I+G+(Ex-Im)=GDP). (and we all know why consumers aren’t spending) then this is a contraction and therefore probably a recessionary spiral which would increase governement outlays to compensate for yet more reduced Consumption. Isn’t this is end of the Keynesian model? Isn’t a given that the only way to fix this problem is the Austrian view that forced austerity (real austerity not a cut in the rate of govt growth) is the only way to eventually recover. Also that would mean the FED would have to reduce purchasing of Treasury debt which would then raise the yield curve and quickly start increasing the overall interest on the debt requiring yet more cuts to the govt budget. I guess you can see where to me this becomes a circular problem. Isn’t the truth that we can’t really get out of this trap unless we have a collapse which will probably be precipitated by the FED continuing to print to purchase Treasury purchaes?

Jeff, I appreciated the article as well. I’m glad to see that we can in fact balance the budget and get by without raising the debt ceiling. I was wondering if you’d be able to tell me what the current US budget is on Agricultural Research – since most of your research at Georgia surrounds Agricultural issues. Is it only coincidental that funding for an area you research gets funding while NASA – an entire federal agency with 18,000 + employees not including contractors. I think its odd though that Nasa is one of the first things cut whenever people talk about cuts (along with education and commerce) when back in the 60′s it was the breadwinner for a country struggling to find successes against the USSR and the first manned space flight (Vostok I) as well as the Bay of Pigs, Vietnam, and to some extent the Korean War. I’m not suggesting that we keep NASA around for nostalgia, but perhaps we can find some way to fund the existing government agencies like we did in 2003 (as you suggest we do with the DOD) although you didn’t really account for inflation either.

Right, and that long term plan I mentioned would need to have teeth. That’s been one of the problems we’ve been having, none of the long term agreements have had teeth.

When is it acceptable to run a deficit? I would say ONLY during war (declared by congress only) or deep financial difficulty (depression, recession). Why can’t we put a law in place to say so?

During boom times we should shrink government big time because that is when we don’t need them. Sure, we can afford them then, but we don’t NEED them. This is the hard part. It is in good times when we don’t do what is right. It has been in good times when we have traditionally funded would-be-nices. We have to stop doing that and pay down the debt instead, same as we would if it were our own family money.

Beth H. – The reality of how things really work is this: The government creates money simply by writing checks to pay its bills. This puts money into the economy and is, in fact, a major chunk of GDP. Direct expenditures alone is 20-25% of GDP. In order for this enormous injection not to be inflationary, government must remove roughly as much money from the private sector as it injects. The tools to do this are taxation and borrowing. The Republican Party, since the administration of Ronald Reagan, has preferred lower taxation and more borrowing, hence higher deficits. The Clinton administration balanced the budget and ran surpluses. He did this by cutting spending, and through the “Clinton Economic Plan” of 1993, which was a package of spending cuts and tax increases which passed without a single Republican vote. As soon as the Republicans took power again in 2001, they began a series of tax cuts and spending increases which restored the system of financing government through massive deficits. President Obama has not had the economic or political climate and possibly lacks the inclination to restore the taxation level back to pre-Bush II times. He has relied, instead, on controlling spending. Now, keep in mind that DEFICITS ARE ONLY A PROBLEM WHEN A DEMOCRAT IS PRESIDENT. When Republicans hold the Presidency, they are perfectly happy to run huge deficits. As Cheney said, “Reagan proved that deficits don’t matter.”

tx. I am not an economist myself, although I am a chemical engineer so I understand dynamic systems, and as such, I deem the economic policies of both major parties to be naive and misguided.

It is indeed because I believe deficits DO matter that I am a Democrat, but I am unhappy with the performance of both of the major parties with regard to deficit spending and the accumulated national debt. I trust neither party but I think the Democrats are more easily influenced, hence my affiliation.

Go back to the tax rate of 1943…Suckers, your back in the days is when the tax rate was high. The tax rate is so low now, and the income inequality is so high now, it won’t take much more to finish the job off.

So to see what a Con Job this Government shut down based on supposed Debt & Deficit worries are, consider the Steps that would convert the US Deficits into a $15-Trillion Surplus and Republicans opposes all of these Steps, proving what true lunatics or worse true enemy within they are, and Obama Democrats have only proposed a slight step regarding 4th Step proving what fraud they are:

1- Cut our Gargantuan Military budget to be inline with size of US economy to World economy. This means cutting it to $200-Bill, which would still leave US with the largest Military budget in the World by FAR. Such as give no more FREE Military to Rich countries of Germany, Japan, UK, South Korea, etc. This step would cut Government spending (Deficits) by $5-Trillion over next 10 years.

2- End the Afghan War and do NOT start new Wars of choice in Syria, Iran, etc.

3- Switch to Government run Universal Socialized health care (NHS), this would give health care to all American People while CUTTING health care spending by 50%. And these INCREDIBLE FACTS are why ALL Conservative parties, repeat for Republican lunatics and fraud Obama Democrats, why ALL Conservative parties, in Europe, Canada, Australia, including Israel the beloved Nation of Republican lunatics, etc. are all 100% for their NHS. This step would cut Government spending (Deficits) by $10-Trillion over next 10 years.

4- Increase the Taxes on the Rich to be the same as on Middle class, not more, but just the same. This means have everyone pay the same FICA Taxes as Middle class and have these Taxes matched by the employer as is the case with Middle class. For example, this means whereas Lloyd Blankfein CEO of GoldmanSachs paid FICA Taxes on 0.1% of his $40-Million salary last year, he would pay FICA Taxes on 100% of his income as Middle class does. This step would raise about $15-Trillion over next 10 years.

For more Google or Anoox: Steps to $15 Trillion Surplus and Republicans oppose all

Max – I’d add abolish the Department of Homeland Security. Why spend a lot of money fighting foreign terrorists who want to destroy our government and economy? After all, we have Republicans doing that here at home and people seem to be okay with it.

max, some very good ideas you have. But healthcare is not something the Constitution allows the fed govt to control. Forget socialism. Sooner or later socialists run out of other people’s $$.

Let the free market have healthcare. Let insurers sell across state lines & enact tort control, part of that being let the loser pay. But then again, the govt couldn’t add one more area of our lives to control & would not have another excuse to tax us more.

I am kinda tired of hearing the govt is shut down. That is a deceptive fear based propagandist overstatement. John Stossel had a great take on Pelosi’s “The cupboard is bare! There is nothing left to cut!” drivel. Stossel showed that indeed, there is a LOT that could be cut.

If the government does not spend the money, it does not disappear. Somebody has it and they will spend it. Whoever the government was going to borrow the money from will either spend it themselves or loan it to somebody else.

JeffreyDorfman – That is the fundamental flaw in your thinking. The government CREATES the money by spending in the first place. It only needs taxes and borrowing in order to keep the value of the dollar from rapidly depreciating due to the huge injection of spending. The banking system is sitting on well over a trillion dollars in excess reserves. If there were demand for more loanable funds in the economy, the banking system would be lending that money. In our current situation, the federal government has no rivals for access to the available credit. If the government were to spend less, money that it would otherwise borrow would be stuck in the banking system’s excess reserves and the money would, in fact, disappear from GDP.

While the money does not disappear, it does not necessarily get spent in the US economy. To the extent that the debt is financed by foreign sources, this loss to the US economy is clear. Even to the extent that the debt would have been financed by domestic investors, their alternative is not necessarily to spend that money in the US economy. Many may park their money in offshore accounts.

Um, I don’t think the author was asserting that this would be GOOD, just that it would be more survivable than most news article suggest.

I mean LOOK at them: most news articles suggest that if the debt ceiling is reached, the US automatically defaults. THIS IS FALSE. Not only don’t we have to default on our debt payments, we don’t have to default on SS or medicare payments, either, and after paying all that we can still run most of the government, albeit at reduced levels.

We are not in such desperate shape as the news media would like you to believe, that is the point.

Sure, if it goes on for months it would lead to a recession, but how likely is that? The Republicans could always kick the tea party out and become a minority party (which is, for all intents and purposes what they are now), and then the logjam gets broken.

Beth H. – Don’t confuse defaulting on the national debt with defaulting generally. If the government can’t borrow to meet its continuing obligations, it has to not pay some of them, IOW default on bills that are already owed. Mr. Dorfman has proposed an imaginary budget. It doesn’t deal with the fact that Congress has already approved a flow of spending that requires continuous borrowing. If the government can’t borrow, then it must default on its bills.